A bespoke approach to investment strategy
"I’m often asked for advice by new investors or people thinking about getting into property. The most frequently asked question is ‘which is the right strategy for me?"
Unfortunately, there is never a definitive answer to that question! The best strategy for anyone is hugely dependent on a number of factors relating to their personal situation. So before you start jumping in and making decisions, grab a piece of paper and jot down your answers to the following questions.
How much cash do you have to invest?
We’re talking about money you have available to invest, not what you can borrow off friends and family. Now they may lend you money but this will need to be repaid at some point. Friend/family money may get you started but you will need to work out to pay that back as well as creating your own larger cash pot for investing.
How much can you prove you earn per year?
If you’re an employee this is pretty straightforward, but if you’re running your own business you’ll need to show actual earnings. If you’re the director of a limited company you probably pay yourself a nominal wage and draw the rest in dividends. You might need to use the figures from your last personal tax return or from your company accounts.
How do you earn it, job or own business?
When you’re looking for a mortgage this will make a difference. Some lenders don’t like self-employed borrowers as much as a nice safe pay cheque every month, so this may restrict the lenders who will contemplate your request.
Lenders also calculate your earnings differently – if you are employed they work on your gross salary but if you are self-employed they work on your net turnover after expenses.
What property do you own currently?
Equity in your home may be useful to borrow against and a track record of consistently keeping up with mortgage payments is always a plus.
Buy to Let lenders in the main require you to already own at least one property to be eligible to borrow from then. First time buyers wanting a BTL mortgage face a highly restricted choice of lenders willing to lend.
What landlord experience do you have?
If you don’t have any experience at all and you’re applying for a BTL mortgage, lenders are very protective of their money, so any experience is better than none, but it doesn’t mean you can’t get a mortgage - just expect to answer quite a few questions about your plans.
What property management skills do you have?
If you’ve worked in lettings or have done rent-to-rent this will give you an idea of what you’re getting into.
What property related practical skills do you have?
If you’re planning to refurb properties to either refinance or resell being able to do some of the work yourself will save money - as long as you have the time to invest and the motivation to get on with it. However, you’ll need to be able to deliver a reasonable level of professional finish - bodging doesn’t add value!
Where do you live?
On one level it doesn’t matter - you can buy properties anywhere - but if you want to be hands-on, your location will affect the properties you can buy. Property prices vary considerably across the country too, so the size and type of property your nest egg will allow you to buy will vary too.
What is your credit rating?
A good credit rating is always a plus. However, if you’ve got a few blots on your rating it doesn’t mean you can’t invest in property – it just means that you won’t have access to the full range of BTL lenders.
What is your age?
What’s this got to do with property investment? It can affect your mortgageability to a degree and your level of involvement to some extent too. The good news here is that BTL lenders recognise that renting property out isn’t that physically taxing really, so they are comfortable giving BTL mortgages to past retirement age people.
Do you want to buy 'ready to rent' or 'doer uppers'?
This is pivotal and directly related to the first question, the size of cash pot that you have to invest in properties. Because when you are investing in property you can choose between two types of property -
- Ready to rent or already rented
- Needing work doing to increase the value and/or make them rentable.
People with bags of cash buy type 1 properties, people with limited cash buy type 2 properties – Why?
Because Type 1 properties suck all your your deposit cash and you cannot get it back out for several years. Only when the market values in the area appreciate does it make sense to resell, so 5+ years in reality.
In contrast, Type 2 properties give you the opportunity to forcibly appreciate the value over a short time period, refinance and pull most/all your cash back out to invest again.
If you are considering using bridging finance it would be a complete waste of time, and more importantly, money, to target Type 1 properties, because it costs you money to have your cash stuck in the property. Bridging can only ever work on Type 2 properties, where you have the potential to add exponential value when you do it up.
Unless you are ‘Mr Moneybags’ my advice is to completely disregard any thought of buying Type 1 properties and look for purely for Type 2 properties that you can add value to.
This allows you to buy more properties, quicker, without tying your money up for years. It’s more profitable and a much better way to move from ‘dabbling in property’ to creating a property career that can give you financial freedom.
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